Market Commentary: China’s 5-Year Plan | Protective assets in your portfolio

Watch Freddy Lim, StashAway Co-founder and Chief Investment Officer and Stephanie Leung, Group Deputy CIO, discuss the latest global events and their potential impact on the markets and on our investment portfolios.

In this episode:

1. Stephanie explains China’s 14th Five-Year Plan (2021-2025) [0:11]
2. Why we’ve reduced Gold in your SRI 36% portfolio [4:30]
3. Growth-seeking and inflation hedging assets in your portfolio [8:00]

FULL TRANSCRIPT

Stephanie | 00:01

Hi, everyone, welcome to this week's StashAway Market Commentary. Together with Freddy, we will be answering questions from our customers. Hi, Freddy! How are you?

Freddy | 00:11

Hi Stephanie! Good to see you again and it's great to be on the show. And I can see we have a lot of questions. But first, I would like to instead ask you a question before - there's been a bit of a buzz a weekend or two ago about this newly released Chinese document. It's a policy document about law and China's future direction. But it's very vaguely worded. But I know it's typically a 5-year horizon thing. Can you sort of take us through what it is about and why the interpretation by the West versus how the Chinese interprets would be different? So first about what it is, Stephanie?

Stephanie | 01:02

Yes, thank you. This document apparently has gotten quite a lot of attention from the Western media. It's actually a document that's being put out every 5 years. So the plan is, I guess, a renewal of the original plan that expired in 2020. The whole document is only in Chinese. So there's no, unfortunately, there's no English version of that. But the title of the document, if I just take it literally, it's called Implementation Outline for the Construction of a Government under the Rule of Law. So this is basically a 23-point action area, a high-level policy framework for the Chinese government to focus on in the next 5 years in various areas to strengthen the rule of law in China. I think the Western media has placed a lot of attention or just kind of [00:02:00] focused on the crackdown of private sectors, in particular some tech industries, and sort of made it sound like this is a new document targeted at these specific industries. In fact, it is not. And if I look at what the Chinese actually read or the focus of the Chinese media, a lot of the focus is actually on President Xi's upcoming election in 2023. So it's interesting to see that there's quite a significant difference as to what emphasis is placed by the West versus the Chinese media.

Freddy | 02:41

One thing I have realised is, correct me if I'm wrong, Stephanie, it seems like the equitable society or wealth distribution, those topics weren't really mentioned in that very important document. But those themes have been central to the crackdown on tech that we've seen so far this year. Is that right? Is that true?

Stephanie | 03:06

Yes. I mean, it's a very high-level document. So, I mean, it wouldn't specifically say anything, any specific action on different industries or even society. I mean, there were 2 points out of the 35 that mentioned some industries, but again, no specific mentions of actions. So I think it's maybe a bit of just kind of the media being overfocused on those 2 points out of the 35. And it's understandable because the media needs to sell, right? So we understand there's a lot of questions about the China Internet sector and particularly KraneShares's China Internet ETF. So we've actually arranged for a webinar [00:04:00] with KraneShare's CIO and it's going to be held with Freddy as well. And it's going to be held on August 24th, Tuesday 8pm, Singapore, Malaysia, and Hong Kong time and 4pm, MENA time. So hopefully everyone can dial in and listen to our discussion and also ask your questions. So maybe with that, let's move on to some of the customer questions. So we have a question from Wood Liao. Wood Liao would like to ask Freddy his personal opinion about Gold. He remembers that you said 20% Gold allocation was used to actually prevent any market crash down. And he's seeing that after the re-optimisation, the Gold allocation in his portfolio has been lowered to 5% only. So Freddy, can you explain a little bit about our strategy on that. And what is the reason behind that?

Freddy | 04:58

Well, first for some context - I think he's mentioning about the SRI 36%, which is the highest risk portfolio, because that's the only portfolio after the July reoptimisation that ended with 4.5% in Gold. Every other portfolio actually has between nearly around 10% to 17.5%. So the treatment hasn't changed except for this portfolio that Wood Liao has pointed out. And the reason specifically to SRI 36% is that, it's the most growth-seeking portfolio. So it will be the most sensitive to making changes, and two, since the US inflation momentum came into the picture, the algorithm felt that the more pressing matter for this portfolio is to try to protect returns. And so in that case, it [00:06:00] ventures into US real estate, because it has recovered a lot and it's a sector that will rotate into becoming more like a winner as the vaccine drive in the US accelerates. And they have been accelerating. So it is a rotation theme that's driving this decision. That's my interpretation for it. And it also goes into other assets because Gold is not the only protective asset in the world, there are still some very high quality bonds that you can seek, even inflation-linked bonds or corporate bonds. REITs is one of the ways. So it's very difficult to try to simply describe it when the algorithm is looking at so many dimensions at the moment. But our interpretation to you is, it's primarily driven by US inflation momentum, although that would have argued to keep more Gold, which has happened for all the other portfolios. But for this portfolio, since it's the most risk-seeking, most returns-seeking one, it sort of ventures into other paths where it has less Gold but it went to real estate that has the highest potential in rotating, it went into some corporate bonds to balance risk. But overall, it has Australian equities internationally, which is a commodity-exporting country as well. That is a very good double-head as an inflation protection and also a growth-seeking asset as well. So there's a lot of stuff going on to sort of rebalance those things elsewhere. This is our best effort interpretation for you, I'm afraid, but hopefully I'm answering the question, Steph.

Stephanie | 07:44

Well, I guess that means ERAA® is actually finding even better assets to invest in rather than just in Gold, which is always good for our investors, I think. Let's move on to the next question, maybe from Kenneth Ou. Kenneth was saying that he was reviewing his [00:08:00] portfolio and also noticed that our view on ex-US is actually disinflationary growth, which I mean, he correctly points out, is in the low-inflation and high-growth quadrant, which is actually a good environment for risky assets in non-US. His question is that he realised that for some of his portfolios, emerging markets in Asia have been removed and there seems to be less non-US exposure for growth. So Freddy, can you maybe comment on that and explain to Kenneth what the reoptimisation is doing?

Freddy | 08:43 

First of all, it's hard to know which portfolio he's in. But to answer the question, the Asia ex-Japan emerging markets have a lot of overlap, sort of correlation among themselves with China Tech as well. They all have a heavy component and China has a hand in it. And the algorithm is sort of decluttering the concentration risk by sort of taking it down and moving it to places internationally, like Australian equities, for example, that I previously mentioned - an asset that the algorithm thinks would double-head as a growth seeker plus an inflation hedge for the US-based assets because they do export commodities, as you know, base metals, materials, and even food prices went up. So that's what the algorithm was trying to do. But it's very difficult to answer the question precisely when the exact portfolios are unknown. But that was my generic explanation just now. But elsewhere, there's a lot of dimensions, where the algorithm tries to balance inflation, growth-seeking, and valuations. [00:10:00] And it's very difficult to sort of summarise it here. So my advice for Kenneth is, if you felt like we didn't answer the question well enough for you, please do reach out to our customer support, attention to me or Stephanie. We will be more than happy to sort of talk about it in more specifics with you.

Stephanie | 10:23

Thank you, Freddy and that's great. Those are the questions for this week. So, as usual, we have a number of upcoming webinars that are very, very interesting. So in Singapore, August 26th Thursday at 1pm, we have an interesting seminar called Integrating a Holistic Approach towards Financial and Mental Wellbeing. In Malaysia, Wednesday September 1st at 6pm, we have An Inside Look into StashAway. In the MENA region on the 25th August at 6pm, we have How to Invest with ETFs (The Right Way). And lastly, in Hong Kong, Thursday, every Thursday at 1.30pm we have an Ask Me Anything in Cantonese with myself and Marco. So thank you very much Freddy and for everyone, have a great week ahead.